Limitations of deductions of interest payments

Highlights

ICC notes that differences in the tax treatment of equity and debt financing have a potentially significant impact on investment decisions This may have been a contributory factor to overleveraging in some economies.

In order to remove this distortion, ICC recommends that Governments consider introducing Allowance for Corporate Equity - an approach which has already been adopted by a small number of countries.

An alternative theoretical approach is to eliminate tax deductions for interest expense. Given the preponderance of countries that allow a level of deduction for interest expense this would be a radical move and would be unlikely in practice to stimulate growth and international development.

In making any changes Governments should be careful not to artificially restrict the deductibility of debt interest. This is especially important given the potential impact on existing business models and long-term investments.